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If you are thinking about selling your business, you are likely feeling overwhelmed with information about what the process is. If you are buying a business, you may have similar feelings. Even those that have been through the process before, can get lost at times. These transactions are complex and often times lengthy. Here are some basics about M&A transactions.
A letter of intent or LOI can be deceiving. They seem informal and relatively benign. In reality this is a document that should not be drafted or executed without careful consideration. This document really lays out the major terms of the M&A transaction. While these terms can adjust as more information comes to light, generally they remain pretty consistent. It is important to negotiate good terms in the LOI to avoid tense negotiations later in the deal.
The terms of the LOI are generally not enforceable but there are often terms that can be binding. The signing of a letter of intent is not going to bind the buyer into paying the purchase price listed in the LOI. Those types of terms are not binding until the purchase agreement is executed. At the same time, exclusivity terms and other restrictive covenants might be binding after the LOI is signed. If there is an agreement that there will be a 6 month exclusive dealing between the buyer and the seller, that can severely impact either party if they see that the deal is not going to get done. You have to treat the LOI like a binding agreement and not just as a mere formality to get the transaction going.
Know MorePurchase agreements agreements are complex documents that stand at the center of a transaction. These extensive documents lay out all the details and particulars of the sale. While a purchase agreement can often be quite lengthy alone, they are often supported by additional agreements, exhibits and schedules. Even in small transactions purchase price, payment terms, what is being acquired, representations and warranties of the seller, representations and warranties of the buyer, dispute resolution terms and more are packed into one document that is supplemented by other agreements such as a lease, a non-competition agreement, a consulting agreement, an assignment and assumption agreement and more.
Each purchase agreement is unique to each transaction. There are even two different types of transactions that are common in M&A deals. Generally there is either a stock sale or an asset sale. Which ever type of deal you and the other party agree to can greatly impact the contents of the purchase agreement.
The terms in the purchase agreement are binding and often replace any previous agreements between the parties. It is incredibly important that these agreements are well drafted because there are plenty of potential mistakes to be made in any number of areas. These mistakes can become huge issues after you believe the deal to be done.
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